Why private hospitals are in poor health

Canadian private equity fund Brookfield’s heavily leveraged takeover of Healthscope has ended ignominiously.

Healthscope entered receivership on Monday after Brookfield walked away this month, tossing the keys to its lenders. The future of its 38 hospitals, with 19,000 employees, is uncertain.

Healthscope succumbed to a toxic mix of debt, long-term trends and short-term shocks. But its crisis highlights broader issues.

Last year, the federal Department of Health’s private hospital “health check” found that average EBITDA margins had fallen sharply since 2018-19 among the operators that opened their books.

Many invested in expansion, particularly in cities, just as day surgery was taking off. Without lucrative overnight room charges, some of those investments don’t stack up. By one estimate, only 64 per cent of beds are being used.

Then along came pandemic disruptions, workforce shortages and surging wage bills that further squeezed margins.

All this has played out amid a bitter stand-off between private health insurers and the hospitals they pay. Funds want lower prices, hospitals say they are already underpaid, and contracts have been torn up.

Policy shouldn’t be written for outliers, and the federal government has rightly ruled out a bailout for Healthscope. But the health of private health is a matter of public interest.

There’s not much evidence that private hospitals take the pressure off public hospitals, as is often claimed. And there is evidence that they are less efficient than their public counterparts, with patients staying longer and getting more low-value care.

But private hospitals play a big role. They deliver about four in 10 hospital stays, and seven in 10 elective surgeries, and many patients value the services and choice they offer. Sudden, widespread closures or upheavals in the sector could be very disruptive.

The government tips in $7.3bn a year in subsidies for private health insurance, and strongarms middle and higher-income people into taking it up by taxing them if they don’t. Those are good reasons to ensure taxpayers, as well as consumers, are getting a good deal.

Instead of yet more subsidies, or a sharp rise in premiums for patients, the best path to viability is value. The key is changing how insurers and patients pay for care.

First, insurers should adopt a minimum “efficient price” for private hospital episodes, much as governments do in the public system. Prices published by the Independent Health and Aged Care Pricing Authority would be a consistent floor for insurers, ending the blame game about what care costs, while encouraging efficiency. Grattan Institute modelling suggests this alone could strip out waste and trim premiums by about 5 per cent.

Second, insurers should be allowed to refuse to pay for low-value or unsafe care. Today they must pay even when the evidence shows no clinical benefit. Giving insurers the right to say no – once the Australian Commission on Safety and Quality in Health Care rules on the evidence – could save at least $1bn a year and push providers to lift quality.

These rules could be even more important if private equity plays a bigger role in the sector in the future, as private equity funds have a chequered record on quality and safety.

One US study of 50 hospitals found that hospital-acquired complications increased after private equity took over. Here in Australia, the NSW Auditor-General found a Healthscope-run hospital in Sydney had high rates of some complications, and had failed to address known safety risks. A review of a toddler’s death at the same hospital found several serious mistakes during his care.

Third, patients should receive a single, bundled bill that covers the surgeon, anaesthetist, prosthesis, imaging and rehabilitation. It’s hard for consumers to shop around for healthcare, particularly when they might face half-adozen different bills for a single episode of care. Hospitals are in a much better position than households to hash out who gets what.

These reforms would give hospitals, insurers and patients price certainty, put downward pressure on premiums, and make private cover more attractive. They don’t require a payout from Canberra, just the political will to stare down both sides of the private-health blame game.

This would be the reboot the system needs: lower premiums, fewer bill shocks, and a clear incentive for hospitals to reinvent themselves for an era in which most surgery is same-day, and much rehabilitation happens at home. 

That way, if another private-equity giant looks at Australian hospitals, it will have to factor in value for patients as well as investors.